UK Crypto Hedge Fund Weathers Market Storm With Arbitrage Strategy

A London-based cryptocurrency hedge fund is staying afloat despite the sharp downturn this year in the price of digital assets.

Nickel Digital Asset Management’s market-neutral arbitrage fund advanced about 0.5% in May, escaping the broader crypto and tech-related equity plunge. For the year, Nickel is down about 0.6%, versus bitcoin’s drop of about 40% and the tech-focused Nasdaq retreating about 24% over the same period. As of April 30, the cumulative performance of Nickel’s arbitrage fund since inception in June of 2019 reached just over 30%, net of all fees. The firm manages about $300 million.

Nickel’s CEO Anatoly Crachilov credits the positive performance to not taking directional views on the market, nor deploying long or short bets on crypto assets. Instead, the company mainly relies on cryptocurrency price dislocations. “What you’re really exploiting is dislocation between spot and derivative markets,” along with arbitrage across different crypto exchanges, Crachilov told CoinDesk.

Investors in the fund may not reap massive upside during a period of rising crypto prices, but their capital is protected during market corrections, Crachilov said. In a market rout, Nickel's main objective becomes protection of investors’ capital, hence the market-neutral arbitrage strategy.

‘Volatility is our friend’

Typical market-neutral equity arbitrage funds tend to post around 8% annualized returns, according to Crachilov, who previously worked at Goldman Sachs and JPMorgan. He thinks crypto-focused funds can beat that figure near term, citing greater market dislocations. In the longer term as crypto markets become more efficient, Crachilov is guiding his clients to similar returns, in the 8%-10% range. Last year, Nickel’s arbitrage fund posted 15% returns.

Nickel’s arbitrage fund avoided Terra exposure, though in a bright spot for the industry, Crachilov says that derivative markets remained “very orderly” during Terra’s collapse. He cited most exchanges remaining open for trading, whereas in previous years, there was more systemic risk for crypto assets and exchanges. The ecosystem has improved, he added.

With respect to overall crypto sector volatility, Crachilov and Nickel’s team of former Wall Street and hedge fund professionals are embracing it.

“Volatility is our friend,” he said. “When people complain crypto is way too volatile – from my perspective – it's not as volatile as I would like,” Crachilov told CoinDesk.

It remains a choppy environment for crypto participants, as Galaxy Digital CEO Michael Novogratz pointed out in a tweet on Friday.

“Crypto trades poorly,” Novogratz wrote. “This is going to be a period that tests people's convictions. We will find a bottom when we do. The break from trad-fi markets is because we don’t have corporate buybacks and giant pension rebalancing that is causing this squeeze in equities.”

Read more: Crypto Hedge Fund Elwood Closes $70M Funding Led by Goldman Sachs and Dawn Capital

UPDATE (May 27, 2022, 21:07 UTC): Updates to include May performance and photo.